What is the annual allowance, and why do I need to know
The government wants people to save for their pension. It makes it attractive to people to save for old age by making it tax-free to save for a pension. But there are limits to what is tax-free.
If, over the course of the tax year, the value of your pension exceeds something called the annual allowance (AA), you pay income tax on the difference. For 2019-2020, the annual allowance is £40,000 for most people, but can be lower if your annual income is more than £110,000.
Say, for example, your AA is £40,000. If the value of your pension increases by £40,000 or less in that year, there is no additional tax to pay. But, if the value of your pension increased by £50,000, then you would pay income tax on the extra £10,0000.
Scheme pays – paying the tax relating to your AA when you retire.
In fact, you could choose not to pay income tax on that excess, but have that tax bill deducted from the value of your pension when you retire; so, you pay the tax bill out of your pension once you have retired. You can do this using
High earners have been hit with high tax bills, so have been working less
Pension tax rules have, over the last several years, impacted on high earning dentists and in some cases this has resulted in those dentists reducing their commitment to the NHS so that they avoid breaching the AA tax charge.
The BDA and other unions took this concern to the Department of Health and Social Care and as a result action was taken. NHS England announced that a one-off arrangement for the AA tax charge would apply for the year 2019-2020. The Welsh Government has also announced that they will follow suit.
What the government is doing to help you
Some dentists who are members of the NHS Pension Scheme may face a tax bill because the value of their NHS pension will have breached their AA. They may therefore face a tax bill for breaching their AA.
The NHS Pension scheme has said that, if you apply, it will pay this tax charge for you for the tax year 19/20. This will have to be disclosed in tax returns submitted by 31 January 2021.
To arrange a ‘Scheme pays’ election you will need to complete
before 31st July 2021. You may wish to engage the assistance of your accountant to do this.
Completing the form allows NHS Pensions to pay the charge for you. Opting for ‘Scheme pays’ means you are deferring the payment of the charge until you retire. At that stage the charge will be deducted from your pension benefits.
For 2019-2020 you are still deferring the charge until retirement but NHS England will ensure that you are fully compensated for the reduction in your pension benefits. This is an important extra benefit for NHS clinicians, but is only available is you elect for the pension scheme to pay the tax charge rather than pay it yourself.
The NHS Business Services Authority will deliver the payments on behalf of NHS England. The arrangement confirms that the benefit promise under the NHS Pension Scheme, is underwritten by the Government.
The arrangement to be compensated at retirement for GDPs is being managed by Dental Services who will provide the form to apply for compensation on Compass
. For salaried dentists both you and your employer will need to complete
a form to claim compensation
. In both cases you will need to complete the Scheme Pays form before you can proceed with the compensation claim. The claim for compensation will be effective from 1st April 2021, if you retire before that claims will be backdated.
The above arrangements do not include those clinicians working in Scotland and Northern Ireland. We have written to both the Scottish Government and the Department of Health in Northern Ireland asking them to confirm their arrangements for 19/20.
If you have any questions on the above please contact our Pensions advisors on 0207 563 6897.